A student loan warning shot

I've always liked the idea of an ombudsman, a person who can look at a situation, praise or criticize it, but most importantly bring attention to a problem.

That's what Rohit Chopra, ombudsman for the Consumer Financial Protection Bureau, has done. Chopra said that based on the complaints the CFPB has received, he is concerned that we are facing a loan servicing sequel that will rival the crises with home loan mortgages that helped lead to the financial collapse in 2008.

The Dodd-Frank Wall Street reform legislation established an ombudsman's position at the CFPB with the specific charge to look at student loans, including private ones. Unlike the federal versions, private education loans generally have higher and variable interest rates.

In March, the CFPB began accepting student loan complaints at www.consumerfinance.gov and toll-free at (855) 411-2372. The agency has received about 2,900 complaints, with the majority related to loan servicing and loan modification issues, Chopra said in his report issued this month.

Chopra says that many borrowers complain they have difficulty trying to contact their servicer. Private student loans are made by banks and credit unions, state-affiliated and nonprofit agencies, schools, and other financial companies, he notes. And similar to the mortgage market, third-party companies can be hired by lenders to collect payments from borrowers.

Borrowers reported problems with trying to take advantage of repayment incentives promised to them before they signed up for the loan.

The CFPB heard from one borrower who had signed up for automatic payments.

She had 36 consecutive monthly payments debited from her checking account. After her 36th payment, she applied to have her co-signer released from the loan, which was a benefit that was advertised at the time she took out the loan. The lender rejected her application, arguing that some of her payments were late. Here's the kicker: The borrower told the CFPB that her lender said "it could take up to three days for the payments to post and some of them posted late."

The experiences chronicled by student loan borrowers are very similar to the servicing practices criticized in the mortgage servicing business, Chopra said. Complaints included not applying people's payments properly, not responding to errors quickly enough and the inability to get in touch with the right personnel in times of

hardship.

"Borrowers had a lot of detours and dead ends," he said.

By far the most common concern communicated by borrowers was difficulty negotiating a repayment plan with their servicer during periods of unemployment, underemployment or financial hardship, Chopra wrote. "Many borrowers report frustration that they are unable to identify appropriate personnel that can make a determination about their repayment options."

Sallie Mae, the nation's largest private student lender, received the bulk of private student loan complaints -- 46 percent -- although Chopra said this could be because the company is such a heavy player in the industry.

In a statement, Sallie Mae responded: "When customers facing financial difficulty have exhausted traditional repayment options, we may offer a variety of tools that help amortize the loan including reduced monthly payments, interest-only payments, extended repayment schedules and temporary interest rate reductions all scaled to a customer's individual circumstances and ability to make manageable payments. In fact, we have modified $1.1 billion in private education loans with interest rate reductions or extended repayment since 2009."

This is what we know about student loans: At more than $1 trillion, they have surpassed credit cards as the largest source of outstanding consumer debt other than home mortgages. Private student loans account for more than $150 billion of the outstanding debt and more than 850,000 of these loans are in default, with even more in delinquency, Chopra reported.

Although the report relies on borrowers' testimonies, we have to address and understand the roadblocks that borrowers face, Chopra said.

So what are the takeaways from this report?

First, contact the CFPB if you have a complaint about your student loan lender. Go to www.consumerfinance.gov/students. Calls to the bureau are answered weekdays 8 a.m. to 8 p.m. (Eastern). Or you can mail your complaint to P.O. Box 4503, Iowa City, Iowa 52244. You can also send a toll-free fax to (855) 237-2392.

If you are going to miss a payment or not make a full payment, contact your servicer or check the CFPB's website to investigate your options, Chopra said.

"When faced with customer service frustrations, we tell people to be persistent and try to stay current so you don't rack up fees or get a black mark on your credit report," he said.

I would like to see the ombudsman's report lead to a comprehensive look at both federal and private student loan lending. Students and parents need to get unbiased pre-borrowing counseling so that they fully understand the magnitude of the debt they might be taking on.

Readers can write to Michelle Singletary c/o The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Her email address is singletarym@washpost.com. Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.